In ESG world, I wanted to highlight this paper from Caroline Flammer and Pratima Bansal. (H/T Alex Edmans) It’s causal evidence for the benefit use of long-term incentives. The paper studies shareholder proposals that not only are on executive compensation, but specifically advocate the use of long-term incentives. (Link to paper here)
The authors use a “Regression Discontinuity Design”. They compare proposals that narrowly pass (with 51% of the vote) to those that narrowly fail (with 49% of the vote). Whether you narrowly pass or narrowly fail is essentially random, and uncorrelated with other factors. So, it’s causal evidence.
They find that proposals to increase long-term compensation improve long-term operating performance, regardless of whether you measure it using return on assets, net profit margin, or sales growth.
From abstract " In this paper, we theorize and empirically investigate how a long‐term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long‐term incentives. Specifically, we examine shareholder proposals on long‐term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long‐term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to (1) an increase in firm value and operating performance—suggesting that a long‐term orientation is beneficial to companies—and (2) an increase in firms' investments in long‐term strategies such as innovation and stakeholder relationships.
In sum, Caroline Flammer (LI profile) and Pratima Bansal suggest corporate short‐termism is hampering business success. Authors show clear, causal evidence that imposing long‐term incentives on executives improves business performance. Firms that adopted shareholder resolutions on long‐term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. Discussed: reasons for these improvements - firms that adopted these resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment.
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If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude.
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